Investment Highlights

• We maintain BUY on Dialog Group with a lowered sum-ofparts-based (SOP) fair value of RM4.80/share (from an earlier RM4.85/share), which implies an CY22F PE of 36x — below its 5-year peak of 39x.
• While our SOP maintains the 650-acre Pengerang buffer land valuation at RM80 psf, we have lowered Dialog’s FY21F earnings by 6% and FY22F by 2% on lowered revenue assumptions for the group’s specialist/technical services due to the ongoing Covid 19 restrictions.
• Even so, Dialog’s 1QFY21 net profit of RM147mil was generally in line with expectations, accounting for 22% of our and 23% of street’s FY21F earnings. Dialog’s first quarter, which accounted for 18%–23% of FY17–FY20 earnings, tends to be its seasonally weakest quarter.
• Dialog’s 1QFY21 revenue halved YoY due to the early cycle progress of Pengerang Phase 3 together with reduced specialist/technical and maintenance services locally and regionally.
• Nevertheless, the group’s core 1QFY21 net profit still rose 8% YoY from the higher associate contributions from the group’s Pengerang Phase 2, which partly benefited from lumpy forex gains, together with a 20% increase in rental rates for half of Pengerang 1 and Tanjung Langsat tank terminals. Additionally, the group enjoyed a lumpy 9-percentage point YoY drop in effective tax rate to 6%, mainly from a one-off 1QFY21 overprovision of RM6mil.
• Dialog’s FY21F earnings will be underpinned by the full-year contribution of Pengerang Phase 1E's 430K m3 storage, which commenced operation in 3Q2019, and Tanjung Langsat 3 terminal's initial 120K m3 capacity, of which half commenced in October 2019 and the rest in January 2020.
• Tank terminal rates, up by 30%–40% from end-CY19 to S$6.50–S$7/m3 currently, will continue to support the earnings of 10% of Pengerang Phase 1's 650K m3 storage, which are on spot charters of up to 3 months.
• Towards the end of 2021, Tanjung Langsat 3's balance 85,000 m3 will be operational while another 100,000m3 will commence in 2022. Thereafter, the group still has ample acreage to double its Pengerang storage capacity with a remaining 500-acre zone comprising reclaimable land and the adjoining buffer zone.
• Dialog currently trades at a FY22F PE of 31x – below its 5- year peak of 39x. We view its higher-than-peer premium as justified given Dialog’s long-term recurring cash flowgenerating businesses underpinned by the Pengerang development’s multi-year value re-rating bonanza and low net gearing levels.

Source: AmInvest Research - 17 Nov 2020